Low allowance prices and concerns over invalidation are reducing interest in Californian carbon offsets, brokers and traders polled by ICIS say, but developers believe demand could increase as the program expands in 2015.

Allowances are trading around $11.75/tonne (€8.69/tCO2e) this week, putting the credits within a dollar of the cap-and-trade programme’s floor price of $10.71/tonne, California carbon brokers said. Offsets are trading in the $9 to $10 price range, developers said, meaning a narrow discount of only around one dollar.

Regulatory risk

The tight spread, along with invalidation concerns around offsets, is making allowances a more attractive option for entities, one broker said.

“It hasn’t made sense [to buy offsets instead of allowances] in terms of the risk,” a second emissions broker added.

An emissions trader also said the offset market “was pretty dead” due to the low allowance prices and additional risk associated with offsets.

A third carbon broker added that the offset market had been hurt by the Californian Air Resource Board’s (ARB) slow approval pace during the first year of the programme.

ARB had hoped to issue its first credits in the Spring of 2013, but failed to actually hand out its first offset credits until September.

The ARB approved 1.2 million offset credits for the Willits Woods project on 13 November. The project, which is the first under the forestry protocol, covers approximately 7,689 hectares (19,000 acres) in Mendocino County, roughly 241 kilometers (150 miles) north of San Francisco. The project was developed by Coastal Ridges.

Growing market?

Overall, offset developers say over 3 million offset credits have been approved, but many more early action projects are awaiting approval by ARB.

An offset developer said until allowance prices or demand rise, offsets likely wouldn’t play into companies’ compliance plans. A second developer said the market was “going through some growing pains” in the first year, but it would likely be smoother as companies gain some confidence in offsets.

“I think there is too much emphasis on invalidation,” a project verifier said.

Developers said the larger entities have been more willing to take on the risk of offsets through the first year. Those companies are buying offsets for a 10 to 20 percent discount on allowance prices, but they can assume the potential risks, developers said.

A carbon advisor said smaller and medium-sized entities are taking a more conservative approach to compliance during the first year.

The market for offsets could expand in 2015, developers said, as the cap-and-trade programme grows to include transportation fuels. But for now, low allowance prices and the invalidation risk is making offsets unattractive to the more than 400 covered entities.

“When allowance prices are near the floor, it impacts offsets,” the verifier said. “Why do all the due diligence when it will only be a dollar cheaper?”